China milk powder firms court foreign cachet for domestic gains

SHANGHAI, May 23 (Reuters) - The rolling green hills andgurgling blonde toddlers in the ads for Yashili InternationalHoldings Ltd underscore how keen China's biggest milkpowder producers are to appear global to emerge from the shadowof a fatal baby formula scandal.

The 2008 incident, which involved melamine-tainted milkpowder, soured China's $12.5 billion infant formula market forlocal firms and helped multinationals with established safetyrecords to nearly double their market share in the past fiveyears. Foreign brands now account for about half of total sales.

"We're an international Chinese firm in exactly the same waythat Coca-Cola or McDonald's are international U.S. companies," said a Yashili spokesman, adding that the company sources allits raw products from New Zealand.

China's infant formula market is expected to grow to $25billion by 2017, Euromonitor data shows, as more mothers jointhe workforce and spend less time breastfeeding. Food safetyconcerns have so far played in favour of global firms likeNestle SA, Danone SA, Abbott Laboratories and Mead Johnson Nutrition Co..

Local companies are now fighting back by espousing foreignsafety standards - Bright Dairy and Food Ltd, forexample, sources the raw materials for its Pure Canterbury brandfrom New Zealand, while China Mengniu Dairy Co Ltd this week struck a deal with Danone.

"I wouldn't underestimate the power of Chinese brands to goupmarket and gain the trust of Chinese consumers, but forgingthese international ties is key," said Shaun Rein, managingdirector of China Market Research Group.

"They can have the best of both worlds - the safety andquality of the product, but also the local know-how, marketing,sales and distribution."

HAPPY COWS, HIGHER PRICES

Domestic milk powder brands want to appeal to the rapidlygrowing number of middle-class working mothers who can affordthe pricier baby formulas made by their international rivals.

China's middle class currently stands at around 300 millionpeople or over one-fifth of the 1.3 billion population, aproportion which could rise to over a half by 2030, consultantsKPMG said in a recent report.

At supermarkets in big cities like Shanghai, a 900 gram tinof infant formula made by an international firm costs between175 yuan ($29) and 275 yuan ($45), compared to about 100 yuan($16) for domestic milk powder in lower-tier cities in China.

To distinguish themselves from the local crowd, milkproducers boasting foreign ingredients have hiked prices to thesame range as global brands.

Beingmate also plays up ties with Swiss foodstuff groupHochdorf Holding AG while Biostime's website lists ArlaFoods as a partner. Then there are the Yashili TVadverts, featuring lush green fields studded with contenteddairy cows and a blonde-haired mother playing with her child.

These marketing strategies are winning over consumers.

Yashili's turnover last year was more than 40 percent higherthan 2009, the year immediately after the tainted milk scandal,while Beingmate's revenue was up 65 percent over the sameperiod. Biostime saw its revenue grow six-fold to 3.4 billionyuan in 2012 from 559 million yuan in 2009.

Li Chuan, a teacher who buys Yashili milk powder for her4-year-old son, said more friends now recommend Chinese brands.

"There are still some problems with some Chinese milk powderbrands, but I think established brands like Yashili willundertake strict checks before they enter the market," she said.

EXORCISING THE MELAMINE GHOST

Foreign partners may help Chinese milk powder producersimprove their reputation, but few parents will ever forget thesix infants who died and the more than 300,000 who fell ill fromlocal formulas that were tainted with melamine, a toxic chemicalused to boost milk protein scores in tests.

More than 20 Chinese companies were implicated in thescandal, resulting in a spike in demand for imported brands.

Some Chinese still risk prison by smuggling in formula fromHong Kong, where prices are lower. Others travel as far asEurope and Australia to buy milk powder in bulk.

Dissident artist Ai Weiwei highlighted public concerns overmilk safety at his latest exhibition, a collection of formulatins arranged in the shape of China.

"A country like this can put a satellite into space but itcan't put a safe bottle teat into a child's mouth. I think it'sextremely absurd," Ai told Reuters at his studio in Beijing.